Schafer: Select Comfort could use some fresh eyes

The bed company Select Comfort Corp. faces a contested election for board seats largely because of frustration over spending on the kind of basic computer system all big ­companies use.

At first glance, that alone seems to qualify this as a case of shareholder activism that's gone overboard. Do the hedge fund guys seeking board seats really want these Select Comfort folks to record sales with paper and pencils?

Dig a little deeper, though, and the activists look far from unreasonable. They are not after a new CEO or strategy. They just want to help ensure money gets spent on things that really will boost the company's growth.

And maybe that's not a computer system costing tens of millions of dollars.

The firm seeking the two seats on Select Comfort's board is called Blue Clay Capital Management, hardly a household name in the Twin Cities financial community. Its desire for two board seats first came to light when the company disclosed that it had interviewed its two nominees, thoughtfully deliberated and then — no big surprise — came out in favor of its own nominees.

The Blue Clay group owns about 2 percent of the company. Turned down after trying it the easy way, the partners decided to battle for the board seats, even though Select Comfort just reported a strong fourth quarter with earnings that easily beat the consensus earnings estimate of the Wall Street crowd.

"The company is executing really well," said Scott Link, portfolio manager with the institutional fund manager Disciplined Growth Investors of Minneapolis, which owns about 7 percent of Select Comfort shares. "We just don't see the need for a change at the board level or executive management."

Blue Clay managing partner Adam Wright declined to be interviewed, and Select Comfort did not respond to calls. What's known about the thinking of Wright and his partners comes from their filing with the Securities and Exchange Commission and conversations with a couple of people familiar with the recent back-and-forth between Blue Clay and Select Comfort.

Blue Clay got its start in 2012, but co-founder Gary Kohler's history with Select Comfort goes back at least to 2001. At that time, Kohler, working through another small public company, put in some of the capital that kept Select Comfort alive. He would certainly remember that Select Comfort abandoned a similar computer system upgrade during the Great Recession, writing off $27.6 million

Blue Clay's just-filed preliminary proxy in support of its nominees didn't even mention computer systems. Instead, the group complains that Plymouth-based Select Comfort spends too much on all sorts of things, from administrative personnel to advertising.

But the upgrade underway to the computer system is a particularly big-ticket item.

To call this a "computer system" understates its importance; we are talking about what is known as an enterprise resource planning system, or ERP.

It's the kind of system that makes it possible, without so much as one person clicking a mouse, to get parts ordered from suppliers so the company can start building more beds just like the ones that got carried out of stores by customers that day.

The company said last month that $11 million of one-time expenses will hit the bottom line this year for what it told shareholders were "launch costs" of the new ERP system. That doesn't include what goes on the balance sheet as a capital investment.

The capital expenditure portion for 2015 will be at least an additional $30 million, about what it was last year. And because it's a multiyear initiative, some analysts have concluded that the company is undertaking an information technology project costing well over $100 million.

Now, Select Comfort is no longer a start-up, at about $1.16 billion in 2014 sales. But that's still a lot to spend for a company that just reported earnings of $68 million in a pretty good year.

Of the two nominees put forward by Blue Clay, Wright and Brian Spaly, neither is the type of technology executive who would seem to have much to offer in a discussion of ERP implementation. That hardly disqualifies them, however. Spaly appears to have an intriguing résumé.

What Spaly would bring is expertise in marketing, online distribution and consumer trends. More important, he would also know how to grow a business while stretching a dollar, having turned $12.4 million of investor capital into $350 million of Nordstrom stock at the closing of the Trunk Club sale. It would be interesting to know how much of the $12.4 million got spent on a computer system.

Spaly has had an answer-to-the-owners, face-to-face kind of working life as a venture-backed company CEO, something that public company executives rarely experience. And that's mostly what the Blue Clay partners seem to want to do at Select Comfort.

The company's executives are likely not all that eager to defend every decision to two well-informed critics a half-dozen times a year. The other Select Comfort shareholders, on the other hand, may want to carefully consider voting for that outcome.

It just may lead to some very good decisions.